What are the liabilities that are applicable to senior officials of a foreign-invested enterprise in China?

The liabilities are divided into three different categories:

• Liability for criminal offenses
• Liability for liquidation
• Liability to the company

Liability for criminal offenses will arise when a breach of company is so severe that such breach qualifies as a criminal offenses, where criminal liabilities will pursue against directors, legal representatives or any management or non-management personnel who are directly involved in such breach. These breaches include, but not limited to, bribery, unlawful seizure and misappropriation of funds. There are gradations to these breaches:

• If the bribe or the unlawful seizure by embezzlement is within the range of RMB 5,000 to RMB 20,000, it is considered “moderate”; whilst
• If the bribe or the unlawful seizure by embezzlement is more than RMB 100,000, then it is considered “major”.

The criminal liabilities applicable to these criminal offenses vary according to their severity, ranging from fines amounting to tens of thousands or investigation by the public security bureau.

Liability of liquidation arises when the Chinese court holds that the shareholders be liable to the debts that are owed by the company to creditors in order to protect the interests of creditors. Technically, such imposition of liability beyond the company is called piercing or lifting the corporate veil. One of such situations would be that the shareholders delay the performance of liquidation of company in such a way that is substantially prejudicial to the creditors’ interests in the company. In cases where the shareholders are held liable for the company’s debt, such liability would be personally, and jointly and severally imposed on the shareholders.

Liability to the company arises when the directors, general managers or senior officials breach their duty of loyalty and diligence to the company by accepting bribes or illicit earnings, or taking illegal possession of the property of the company. Such breach, if amounts to losses of company, will have to be compensated by the violating senior officials. Also, such violating senior officials will be banned from serving as director, supervisor, or senior management personnel of any company within three years from the date of the completion of bankruptcy procedure.